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A woman passes by a digital stock indicator as stock prices sharply rose in Tokyo Monday, June 21,
2004. Tokyo stocks opened moderately higher Monday morning amid ongoing expectations for
the Japanese economy's recovery. The 225-issue Nikkei Stock Average continued to climb to
11,656.90, up 274.82 points at the end of the morning session. (AP Photo/Koji Sasahara)
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Introduction
The Bank of Japan submitted its Semiannual Report on Currency and Monetary Control for the
second half of fiscal 2003 to the Diet on June 4, 2004. I am pleased to have this opportunity
to present an overall review of the Bank's conduct of monetary policy.
I. Developments in Japan's Economy
When I spoke to this committee in March 2004, I presented the assessment that Japan's economy
was recovering gradually. Since then, industrial production and corporate profits have continued
to increase due to a substantial rise in exports, and against this background business fixed
investment has continued to recover. The decline in household income is gradually coming to a halt,
and private consumption is showing some positive movements. With a virtuous cycle in operation, the
economy continues to recover gradually and domestic demand is becoming firmer.
As for the outlook, Japan's economy is expected to continue its recovery as momentum increases
gradually.
Overseas economies are likely to continue growing relatively fast, despite some negative factors
such as geopolitical risks and the rise in crude oil prices. The U.S. economy continues to show
balanced growth. Private consumption and business fixed investment remain firm, and in the
employment situation a recovery which had been delayed is becoming clearer. East Asian economies,
particularly China, are likely to continue high growth. Reflecting such developments in overseas
economies, Japan's exports and production are expected to continue on an increasing trend.
Furthermore, corporate profits are likely to remain on an uptrend as exports and production
increase, given the progress in dealing with problems, such as excessive labor and debt, which
were part of the background to the delay in Japan's economic recovery. Business fixed investment
is therefore likely to continue on an uptrend, particularly in the manufacturing sector. The
increase in production and corporate profits is expected to exert positive effects gradually
on the household sector through changes in employment and income as well as in asset
prices. Against this background, private consumption is expected to recover at a moderate pace.
On the price front, domestic corporate goods prices have been rising recently, due to the
strengthening of commodity prices at home and abroad and to the improvement in supply and demand
conditions, and they are expected to continue increasing for some time. The year-on-year rate of
change in consumer prices (excluding fresh food) has been close to zero percent. As for the
outlook, the output gap, which affects the underlying trend of prices, is expected to narrow
steadily, but temporary factors, such as the increase in rice prices that has contributed to
a slowdown in the year-on-year rate of decline in consumer prices, will dissipate
gradually. Furthermore, the increase in productivity in the corporate sector is likely to absorb
the effects of the rise in commodity prices. Given this situation, consumer prices are basically
projected to continue falling slightly on a year-on-year basis.
As for the recent rise in crude oil prices, however, future developments and their effects require
close monitoring.
The money market continues to be stable overall against the background of the Bank's provision
of ample liquidity. In the capital market, Japanese stock prices declined temporarily from late
April given declines in stock prices and rises in interest rates worldwide, but they rose
thereafter. Long-term interest rates have been stable on the whole, but are recently rising
somewhat.
The environment for corporate finance is becoming more accommodative on the whole, although it
remains severe for firms with high credit risks. The rate of decline in lending by private banks
has been diminishing slightly, and the fund-raising environment for firms in the capital market
through corporate bonds and CP continues to be favorable.
II. Conduct of Monetary Policy
The Bank has been conducting the quantitative easing policy with the outstanding balance of current
accounts held at the Bank as the operating target. In accordance with the current target range
for the outstanding balance of "around 30 to 35 trillion yen," the Bank provides ample liquidity to
the money market. The Bank has also made a commitment to maintain the quantitative easing policy
until the year-on-year rate of change in the consumer price index (CPI; excluding fresh food, on
a nationwide basis) registers zero percent or higher on a sustainable basis.
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Honda Motor Co. President Takeo Fukui, left, joins models to pose in a skeleton model of the
automaker's new mini van Edix featuring 3x2 seats during a press preview in Tokyo Wednesday,
July 7, 2004. The new 3x2 concept consists of long-sliding center seats, particularly front
center seat is set 100mm to 270mm behind the driver's seat, forming the letter V layout for the
safety of children. Edix starts to sell from Thursday in Japanese market. (AP Photo/Katsumi
Kasahara)
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Against the background of this policy, financial institutions have been more confident in raising
funds in the money market, and this has been contributing to stability in financial markets. The
Bank's commitment to maintaining the policy has contributed to stabilizing market participants'
projection of future interest rates, and thus market interest rates have been stable. In this
situation, firms have been able to raise funds at low interest rates. Reflecting the recovery
of the economy, firms' returns on investment are expected to increase, and the current
quantitative easing policy will therefore further promote their positive activity. The effects
of the quantitative easing policy will support the economy more strongly as it continues to
recover.
With these points in mind, the Bank has continued to conduct its quantitative easing policy with
the commitment based on the CPI.
The Bank has been making efforts to make credit intermediation in the market more diversified and
efficient so that monetary easing effects permeate further throughout the economy, and these efforts
are expected to improve the Japanese capital market in the long term. As part of such efforts,
the Bank started to purchase asset-backed securities (ABSs) from July 2003, and the total amount
of ABSs purchased to date has reached around 800 billion yen. In addition, the Bank hosted the
Workshop on Securitization, and exchanged views about practical problems and possible solutions
with market participants to back the development of the ABS market. In April 2004, the Bank
released the results of the discussions held at the Workshop, which contained specific
proposals, for example, a proposal that prices of securitized products should be evaluated more
accurately and efficiently.
In May, the Bank introduced a facility which provides the markets with Japanese government securities
(JGSs) held by the Bank as a secondary source with a view to enhancing the liquidity of JGS
markets. The Bank has been making a wide range of efforts to improve the infrastructure of financial
markets and will continue to do so.
III. Purchases of Stocks Held by Commercial Banks
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A visitor to the World Hydrogen Energy Conference looks at at a skeleton model designed to show
connection among a fuel cell stack, middle, a power control unit, top, an electric motor,
bottm left, and others of Toyota Motor Corp.'s FCHV fuell cell vehicle in Yokohama, south
of Tokyo, Monday, June 28, 2004. Automakers, gas providers, and battery manufacturers
display the world's top fuel cell technology and its infrastructure at the conference.
(AP Photo/Koji Sasahara)
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The Bank started to purchase stocks held by commercial banks from November 2002 to reduce the risk
that stock price fluctuations might impact negatively upon the business management of individual
financial institutions, potentially resulting in instability of the financial system as
a whole. The total amount of stocks purchased by the Bank as of May 31, 2004 was 1,979.9
billion yen.
Conclusion
Japan's economy is expected to continue recovering as it gains further momentum gradually. To
ensure that this recovery will become sustainable and to overcome deflation, the Bank considers
it essential that a wide range of economic entities continue to make efforts to revitalize the
economy.
The Bank is determined to firmly support Japan's economy by continuing with monetary easing even
as the economy continues to recover, in order to realize sustainable growth and overcome
deflation.
